HIGH COURT OF DELHI
NTPC Ltd.
versus
Deputy Commissioner of Income-tax
W.P. (C) NO. 14562 OF 2006
JANUARY 10, 2013
JUDGMENT
Badar Durrez Ahmed, J.
By way of this writ petition, the National Thermal Power Corporation Limited (NTPC Limited), a public sector undertaking, is seeking the quashing of a notice dated 03.02.2006 issued by the respondent No.1 (Deputy Commissioner of Income Tax, New Delhi) issued purportedly under Section 148 of the Income Tax Act, 1961 (hereinafter referred to as ‘the said Act’), whereby the said respondent No.1 has indicated that he has reason to believe that the petitioner’s income chargeable to tax for the assessment year 2000-01 has escaped assessment within the meaning of the said Section 148 and, therefore, the respondent No. 1 proposes to re-assess the income for the said assessment year. By virtue of the said notice, as is the requirement under law, the petitioner was required to deliver a return in the prescribed form for the said assessment year within thirty days of the service of the notice. The said notice was accompanied by a copy of the purported reasons for re-opening of the case.
2. The reasons are in respect of several assessment years, namely, 1999-2000, 2000-01, 2001-02, 2002-03 and 2003-04. However, we are, in this petition, concerned only with the assessment year 2000-01. Two reasons have been set out in the said document. Reason one pertains to the non-eligibility of deduction under Section 80IA in respect of the steam turbine of the combined cycle gas power stations belonging to the petitioner. The second reason pertains to the taxability of income tax recoverable by NTPC from the State Electricity Boards’. We shall deal with these purported reasons in greater detail later. For the present, it would be necessary to set out in brief the challenge of the petitioner to the impugned notice dated 03.02.2006. According to the petitioner, the notice is barred by limitation inasmuch as it has been issued beyond four years from the end of the relevant assessment year. In the present case, 2000-01 is the relevant assessment year. Therefore, the four-year period would have ended on 31.03.2005. The notice which is impugned in this petition has been issued on 03.02.2006. This is clearly beyond the period of four years. The only way in which this notice can be saved is if the factual position falls within the parameters specified under the proviso to Section 147 of the said Act.
3. It was contended on behalf of the petitioner that before the proviso to Section 147 of the said Act can be invoked by the revenue, it has to be shown that there is an escapement of income chargeable to tax from the assessment done under Section 143(3) of the said Act and that this has been occasioned by reason of failure on the part of the assessee to make a return under Section 139 or in response to a notice under Section 142(1) or Section 148 or a failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that assessment year. In the present case, the question of non-filing of a return does not arise and, therefore, the only two things that need to be seen are whether any income chargeable to tax has escaped assessment and whether this has been occasioned by the failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment in respect of the assessment year 2000-01.
4. According to the learned counsel for the petitioner, neither of these two conditions have been satisfied. In other words, there is no income chargeable to tax which has escaped assessment nor has there been any failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment.
5. It has also been contended that for these reasons the proviso to Section 147 of the said Act is not triggered and, therefore, the impugned notice dated 03.02.2006, having been issued beyond the period of four years from the end of the relevant assessment year, is clearly time barred and, therefore, ought to be quashed as also all proceedings pursuant thereto.
6. We shall now set out the sequence of events. On 27.11.1998, the petitioner filed its income tax return with the respondent No.1 for the assessment year 1998-99. In the assessment order pertaining to the year 1998-99, the entire manner of functioning of the gas turbine unit and the steam turbine unit at the four different projects of the petitioner at Anta, Auraiya, Kawas and Dadri were discussed. The assessee had been asked to explain as to how the fuel cost in the steam unit was shown as zero by the petitioner. By a letter dated 10.01.2001, the petitioner replied as under:-
“Consumption of Fuel in Gas Power Station
NTPC has set up Gas Power Station at Anta, Auraiya, Kawas, Dadri, Jhanor Gandhar and Faridabad as combined cycle gas power stations. These stations have number of gas turbines, which independently generate power, by separately feeding fuel in the form of natural gas/HSD or Naptha. The natural gas after mixing with the air is burnt in the gas combustion chamber to produce gases at a very high temperature. These gases are used to run gas turbines for generation of electricity. The Gas Turbine exhaust hot air gases, which otherwise have no commercial value, are then released into atmosphere. With the advancement in technology the waste heat recovery boilers have been invented to utilize such hot exhaust gases.
The exhaust hot gases from gas turbine are routed through the waste heat recovery boilers to utilize it in heating water and producing steam. The steam produced in waste heat recovery boilers is then run to generate electricity in the steam turbine attached separately with such boilers. The steam turbine can only be run from hot gases released from the gas turbine. In case of any failure of the steam turbine the hot gases being released after generation of power in gas turbine has to be discharged in the atmosphere since it has no other commercial value. All gas turbine and steam turbines separately generate electricity and have separate control system, separate turbines, separate gas combustion chambers for gas turbines and boiler for steam turbine for generation.
As explained above the steam turbine does not consume any fuel except waste hot gases of gas turbine. In view, thereof, no fuel cost has been indicated in steam turbines.”
Thereafter, the petitioner furnished another letter dated 27.02.2001 indicating the working of the steam turbine at the gas power station. The said working was described as under:-
“Working of Steam Turbine at Gas Power Station
NTPC has set up Gas Power Station at Anta, Auraiya, Kawas, Dadri, Jhanor Gandhar and Faridabad. These power station have two distinct types of prime movers gas Turbines and Steam Turbines. The fuel (Natural Gas/KSD/Naptha) is burnt in the combustion chamber of Gas Turbine and the product of combustion (hot gases) is expanded in Gas Turbine. The mechanical power thus developed drives an electric generator for generating electricity.
Hot gases are exhausted after their expansion in the gas turbines. As the exhausted gases are no longer required they are known as waste hot gases and are let out in the atmosphere. These waste hot gases do not have any combustion properties. With the availability of technology, steam turbines are installed at a massive cost, which is higher than the cost of the normal gas turbine. These waste hot gases are routed through the waste heat recovery boilers for generation of power. These waste exhaust hot gases from gas turbines can also be let out to the atmosphere directly through a by pass stack. If waste hot gases are exhausted directly to the atmosphere the residual heat contained in it is totally lost. However, when it is passed through a Waste Heat Recovery Boiler, it is possible to partly reclaim the residual heat for generation of power.
No fuel is required to be used for generation of power by the waste heat recovery boiler (WHRB). In other words, the steam turbine uses only the waste exhausted heat of such gases in WHRB for generation of power.
You have desired us to furnish quantity and cost of exhausted hot gases used in waste heat recovery boiler. On this point we wish to submit that it is not possible to work out actual quantity of exhaust hot gases consumed in WHRB. Depending on grid conditions flow of gases in the waste heat recovery boiler varies from time to time on continuous basis. At times on account of technical reasons the gas station is run in an open cycle and therefore waste hot gases are being discharged into atmosphere.
In view of above the flow of waste hot gases in waste heat recovery boilers is neither practicable nor being measured on actual basis. We reiterate that since no fuel is being consumed in waste heat recovery boiler there is no fuel cost that can be allocated to generation of power by steam turbine.
It may be mentioned here that the waste hot gas is not a commercial commodity and is not brought to the market for sale and purchase. It is not capable to being transported to a distant place because it would lose it potential heat. Moreover, because of huge requirement of compressor power for transportation and capital cost of equipment like compressor, piping, etc., it is uneconomical to transport the gases even to a nearby location as these waste hot gas is of very low pressure and density.
In view of the above, it is submitted that waste hot gases are not marketable nor are being sold or bought in the market. They have not market value at all.”
7. From the above, it is clear that the petitioner had made it known to the respondent No.1 that the gas turbine exhausts hot air gases, which otherwise have no commercial value and would normally be released into the atmosphere. However, with the advancement of technology, waste heat recovery boilers have been invented to utilize such hot exhaust gases, which, in turn, run the steam turbines to generate additional electricity. It has been clearly pointed out by the petitioner that the power stations of the petitioner have two distinct types of prime movers, gas turbines and steam turbines. The fuel which could be naptha, natual gas or HSD is burnt in the combustion chamber of the gas turbine and the product of combustion – hot gases, generates mechanical power which drives the electric generator for generating electricity. These hot gases are exhausted after their expansion in the gas turbines, as they are no longer required in the gas turbine unit. However, because of the technology of waste heat recovery boilers, the exhaust gases from the gas turbine unit are utilized by the steam turbine unit for further generation of electricity. In this manner, through the use of the waste heat recovery boiler, it is possible to partly reclaim the residual heat for generation of additional power. The steam turbine uses only the waste exhaust heat of such gases generated in the gas turbine unit through the technology of waste heat recovery boiler. One of the contentions of the petitioner was that the fuel cost of the steam turbine unit was zero. We shall deal with this aspect of the matter subsequently. For the present, it is clear that the waste hot gases produced in the gas turbine unit in the course of generating electricity are re-utilized through the waste heat recovery boiler for driving the steam turbine which, in turn, generates additional electricity. The entire process of generation of electricity was clearly set out by the petitioner before the respondent No.1 in respect of the assessment year 1998-99.
8. We may also point out that in the course of finalizing the assessment for the assessment year 1998-99, the respondent No. 1 wrote a letter to the petitioner to clarify, inter alia, the following:-
“1. Income-tax recoverable from customers – On page 157 of the Return of Income, it is stated (point no. 13) that as per Tariff Notification issued by the Govt, of India. The Incidence of Income tax on the Income from generation of electricity is recoverable from customers. For the A.Y. 1998-99, this amount is Rs. 86081 lacs. This has not been taken as part of income or as part of sales of electricity. Why?”
The said letter was replied to by the petitioner on 05.03.2001, wherein they enclosed a detailed note regarding the impact of income tax liability of NTPC with regard to generation of income.
9. On 29.11.2000, the petitioner filed its original return for the assessment year 2000-01. We may point out that being aggrieved by the assessment order in respect of the assessment year 1998-99 dated 22.03.2001, the petitioner preferred an appeal being Appeal No. 2/2001-02 before the Commissioner of Income Tax (Appeals) sometime in April, 2001. During the pendency of the appeal for the assessment year 1998-99, the assessment in respect of the assessment year 2000-01 was completed under Section 143(3) on 27.02.2002, whereby the respondent No.1 followed the orders in respect of the assessment year 1998-99 and 1999-2000 and the deduction under Section 80IA was re-worked by taking a part of the fuel cost against the profits of the steam undertaking. The respondent No.1 also noted that the income tax liability on generation had to be grossed up on account of the State Electricity Boards’ liability to bear the tax.
10. On 28.02.202, the Commissioner of Income Tax dismissed the appeal in respect of the assessment year 1998-99. Being aggrieved by the order passed by the Commissioner of Income Tax (Appeals) in respect of the assessment year 1998-99, the petitioner preferred an appeal before the Income Tax Appellate Tribunal (ITAT) being ITA 1377/Del/2002, sometime in April, 2002. A similar appeal was also filed by the petitioner before the ITAT in respect of the assessment year 1999-2000 being ITA No. 2188/Del/2002. We may also point out that by virtue of the minutes of meeting held on 13.09.2002, the Committee on Disputes had permitted the petitioner to pursue the appeals before the Tribunal. On 26.05.2004, the Income Tax Appellate Tribunal decided the appeals in favour of the petitioner and held that there was no basis to apportion the cost of fuel to the steam turbine undertakings. In the said order, the ITAT noted that it was the case of the Assessing Officer that the profits of each unit had to be determined independently as if such units were the only source of income of the assessee/petitioner. The Tribunal observed that there was no dispute to such a submission and that, according to it, profits of the gas unit as well as the steam unit must be determined independently as the sole source of income of the assessee and consequently, the expenditure incurred for the generation of electricity by the gas unit cannot be shifted to any other unit, even by the logic of the Assessing Officer. The Tribunal further held that for similar reasons, profit of the steam unit had to be determined independently on the basis of the expenditure incurred by such unit. Since the steam unit had not incurred any expenditure for acquiring the hot gas, the question of reducing the profits of such unit by any notional figure did not arise. Consequently, the Tribunal accepted the pleas of the petitioner and rejected those of the revenue.
11. We are not so much concerned about the merits of the decision but with the fact that the entire process of production of electricity by both the gas turbine and the steam turbine were examined threadbare at all stages – before the Assessing Officer, The Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal. The petitioner had clearly set out and explained the method of electricity generation by both the units and it is the Tribunal which held that it should not be regarded as an integrated unit but as two separate and independent units. This was also the stand taken by the Assessing Officer with regard to the nature of the two units being independent and not integrated.
12. Thereafter, on 23.09.2004, the respondent No.1 forwarded a letter to the Commissioner of Income Tax (Appeals) along with a copy of the purported inspection report which had been allegedly carried out on 02.09.2004 and to consider the same in the pending appeals of the petitioner for the assessment years 2000-01, 2001-02, 2002-03 and 2003-04. In this inspection report, it has been stated that the contention of the assessee (NTPC), that it has two separate units for generating electricity, cannot be accepted to be correct as the waste heat utilization plant is basically a dependent unit of the first plant, that is, the gas turbine plant and is completely dependent on its working. As per the report, “by no stretch of imagination, can it be inferred that these are two different units as the second unit i.e. the waste heat utilization plant is totally dependent on the first unit.” It was further stated in the said report that the second plant cannot be said to be an identifiable undertaking separate and distinct from the existing business. The report, therefore, concluded by noting that it would not be correct to say that the assessee has two different units for generation of electricity and, therefore, the assessee is not right in claiming deduction under Section 80IA on two different profits by showing two different P & L Accounts of these units.
13. The petitioner sent a response on 27.04.2005 to the inspection report and stated that there are no fresh facts in the report and that, in any event, the ITAT’s order was applicable. The petitioner also submitted that mere dependence of one unit on the other did not mean that the steam undertaking was not an industrial undertaking for the purpose of Section 80IA of the said Act.
14. In the meanwhile, on 20.10.2004, the respondent No.1 applied to the Committee on Disputes for permission to file an appeal from the Tribunal’s said order to this Court under Section 260A of the said Act. During the pendency of the application for permission to file an appeal, the respondent No.1 filed an appeal before this Court being ITA 756/2004. However, by an order dated 03.12.2004, this Court disposed of that appeal on the ground that since the High Powered Committee on Disputes had not granted permission till then, this Court was not inclined to entertain the petition at that stage. This Court, however, directed that it would be open to the revenue to apply for re-filing of the appeal after the clearance is given by the High Powered Committee in favour of the revenue. The clearance was not given inasmuch as, on 08.06.2005, the Committee on Disputes rejected the application of the revenue. The relevant portion of the minutes of the meeting pertaining to the petitioner are as under:-
“Meeting of the Committee on Disputes was held at 1030 hours on 08.05.2005 in the Committee Room, Cabinet Secretariat, Rashtrapati Bhavan, New Delhi. The items considered and the minutes thereon are as under:-
